Testimony 

Before the Subcommittee on Government 

Efficiency and Financial Management, 

Committee on Government Reform, 

House of Representatives 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 2 p.m., EST 

Tuesday, June 10, 2003 DEPARTMENT OF 

EDUCATION 

Status of Efforts to 

Address Major 

Management Challenges 

Statement of Linda Calbom 

Director, Financial Management and Assurance 

GAO-03-872T 
Education has taken steps to address its continuing challenges of reducing 

vulnerabilities in its student aid programs and improving its financial 

management, such as establishing a senior management team to address 

management problems, including financial management, throughout the 

agency. And, while Education has made significant progress, weaknesses 

remain that will require the continued commitment and vigilance of 

Education’s management to resolve. 

• Reduce vulnerability of student aid programs to fraud, waste, 

abuse, and mismanagement. Education has made considerable 

changes to address the ongoing challenges in administering its student 

aid programs. However, Education needs to continue to address 

systems integration issues, reduce fraud and error in student aid 

application and disbursement processes, collect on student loan 

defaults, and improve its human capital management. 

• Improve financial management. Education has implemented many 

actions to address its financial management weaknesses. Significant 

progress was made earlier this year when Education received an 

unqualified—or “clean”—opinion on its financial statements for fiscal 

year 2002. While this is an important milestone for the department, 

internal control and systems weaknesses remain that impede 

Education’s ability to produce timely, accurate, and useful financial 

information for its managers and stakeholders. 

History of Financial Management Weaknesses 

Fiscal 

year Audit opiniona 

Material internal control 

weaknesses

Noncompliance with federal 

systems requirementsb 

1995 Disclaimer Yes N/A 

1996 Disclaimer Yes N/A 

1997 Unqualified Yes Yes 

1998 Disclaimer Yes Yes 

1999 Qualified Yes Yes 

2000 Qualified Yes Yes 

2001 Qualified Yes Yes 

2002 Unqualified Yes Yes 

Source: Auditors’ reports for fiscal years 1995-2002. 

a

Auditors issue unqualified opinions when the financial statements are presented fairly, in all 

material respects. Qualified opinions are issued when the financial statements are presented fairly, 

with exceptions that are specifically disclosed and described. Disclaimers of opinion are rendered 

when auditors cannot satisfy themselves as to whether the financial statements are presented fairly. 

b

These requirements became effective for fiscal year 1997. 

In its 2003 performance and 

accountability report on the 

Department of Education, GAO 

identified challenges in, among 

other areas, student financial aid 

programs and financial 

management. The information 

GAO presents in this testimony is 

intended to assist Congress in 

assessing Education’s progress in 

addressing and overcoming these 

challenges. 

GAO is not making new 

recommendations in this 

testimony, but past reports have 

made specific recommendations 

aimed at addressing some of these 

major management challenges. 

DEPARTMENT OF EDUCATION 

Status of Efforts to Address Major 

Management Challenges 

www.gao.gov/cgi-bin/getrpt?GAO-03-872T.

To view the full testimony, click on the link 

above. For more information, contact Linda 

Calbom at (202) 512-9508 or 

calboml@gao.gov. 

Highlights of GAO-03-872T, a testimony 

before the Subcommittee on Government 

Efficiency and Financial Management, 

Committee on Government Reform, 

House of Representatives 

June 10, 2003 
Page 1 GAO-03-872T 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the major management challenges 

faced by the Department of Education, its progress in addressing them, 

and challenges that remain. 

As you know, this January, we issued our Performance and Accountability 

Series on management challenges and program risks at major agencies, 

including the Department of Education.1

 The report for Education focused 

on a number of management challenges and continued the high risk 

designation for student aid programs. You asked me to focus my testimony 

on two areas in that report. These are Education’s efforts to (1) reduce 

fraud, waste, abuse, and mismanagement in its student aid programs while 

continuing to ensure access to postsecondary education and (2) improve 

its financial management to help build a high-performing agency. 

Education has taken steps to meet these challenges, such as establishing a 

senior management team to address management problems, including 

financial management, throughout the agency. And, while Education has 

made significant progress, including receiving a clean opinion on its fiscal 

year 2002 financial statements, weaknesses remain that will require the 

continued commitment and vigilance of Education’s management to 

resolve. I will discuss Education’s student aid programs and financial 

management in turn. 

Ensuring access to postsecondary education while reducing vulnerability 

of student financial aid programs to fraud, waste, abuse, and 

mismanagement is one of the key management challenges Education 

faces. Education helps millions of students enroll in higher education 

programs by providing for more than $50 billion in grants and loans 

annually. The department is responsible for ensuring that these programs 

are efficiently managed, establishing procedures to ensure that loans are 

repaid, and preventing fraud and abuse. Since 1990, we have identified 

Education’s grant and loan programs as high risk for fraud, waste, abuse, 

and mismanagement. 

Both Education and Congress have made changes to address management 

challenges in the student financial aid programs. Congress established 

 1

U.S. General Accounting Office, Major Management Challenges and Program Risks: 

Department of Education, GAO-03-99 (Washington, D.C.: January 2003). 

Student Aid Programs 
Page 2 GAO-03-872T 

Education’s Office of Federal Student Aid (FSA) as a performance-based 

organization in 1998. Its purpose is to increase accountability of officials, 

provide greater flexibility in management, integrate information systems, 

reduce costs, and develop and maintain a system that contains complete, 

accurate and timely data that can ensure program integrity. In 2001, 

Education established a Management Improvement Team (MIT) of senior 

managers to formulate strategies to address key management problems 

throughout the department. According to Education, MIT has developed a 

system to identify, track, and resolve audit and management issues both 

agencywide and in the student financial aid programs. 

Education has faced challenges in four areas related to its grant and loan 

programs. These are (1) financial aid system integration issues, (2) fraud 

and error in student aid application and disbursement processes, 

(3) defaulted student loans, and (4) human capital management. I would 

now like to briefly discuss each of these challenges. 

Education has spent millions of dollars to integrate and modernize its 

many financial aid systems in an effort to provide more information and 

better service to students, parents, institutions, and lenders. Effectively 

and efficiently investing in information technology requires, among other 

things, an institutional blueprint that defines in both business and 

technical terms the organization’s current and target operating 

environments and provides a transition road map. Because Education did 

not have this blueprint, commonly called an enterprise architecture, we 

recommended in 1997 that the department develop an architecture and 

establish standard reporting formats and data definitions.2

 In September 

2002, Education’s Office of the Inspector General (OIG) reported that the 

department had made progress in taking specific actions to lay the 

groundwork for an enterprise architecture. Still, critical elements need to 

be completed, including integrating separate architectures into a 

departmentwide architecture and fully implementing common identifiers 

for students and institutions to use in departmentwide system 

applications. As part of our review of the progress federal agencies have 

made to effectively develop, implement, and maintain their enterprise 

architectures, we are currently evaluating the management of Education’s 

enterprise architecture efforts. 

 2

U.S. General Accounting Office, Student Financial Aid Information: Systems 

Architecture Needed to Improve Programs’ Efficiency, AIMD-97-122 (Washington, D.C.: 

July 29, 1997). 
Page 3 GAO-03-872T 

With respect to modernization plans, we reported in November 2001 that 

FSA selected a viable, industry-accepted means of integrating its existing 

data on student loans and grants.3

 FSA has made progress in implementing 

this approach for its Common Origination and Disbursement process, 

which includes the implementation of a common record that institutions 

can use to submit student financial aid data for Pell Grant and Direct Loan 

programs. The ultimate success of this process, however, hinges on 

addressing serious postimplementation operational problems and helping 

thousands of schools implement the common record. Further, as we 

reported in December 2002,4

 FSA has not completed a number of elements 

that are important for managing any information technology investment. 

These include determining whether expected benefits are being achieved 

and tracking lessons learned related to schools’ implementation of the 

common record. We have recommended that FSA develop metrics, 

baseline data, and a tracking process for certain benefits expected from 

the system, and that it develop and implement a process for capturing and 

disseminating lessons learned to schools that have not yet implemented 

the common record. FSA has begun acting on both of these issues. 

Education has also faced challenges in ensuring that information reported 

on student aid applications is correct and that adequate internal controls 

are in place to prevent improper payments of grants and loans. The 

department has taken steps, in two pilot programs with the Internal 

Revenue Service (IRS), to match income reported on student aid 

applications with federal tax returns.5

 To continue this income match and 

implement it on a broader scale, legislation to allow IRS to release the 

information is necessary. Education has worked with the Department of 

the Treasury and the Office of Management and Budget to ask that 

Congress enact such legislation. The department also verifies income 

information by asking 30 percent of applicants to provide copies of their 

tax returns to their student financial aid offices. In addition to 

strengthening its controls over student aid applications, we found that 

Education also needed to address institutions that were disbursing grants 

 3

U.S. General Accounting Office, Student Financial Aid: Use of Middleware for Systems 

Integration Holds Promise, GAO-02-7 (Washington, D.C.: Nov. 30, 2001). 

4

U.S. General Accounting Office, Federal Student Aid: Progress in Integrating Pell Grant 

and Direct Loan Systems and Processes, but Critical Work Remains, GAO-03-241

(Washington, D.C.: Dec. 31, 2002). 

5

U.S. General Accounting Office, Major Management Challenges and Program Risks: 

Department of Education, GAO-01-245 (Washington, D.C.: Jan. 2001). 
Page 4 GAO-03-872T 

to ineligible students.6 The department has taken steps to analyze student 

data to identify high concentrations of students over age 65 and eligible 

noncitizens at individual institutions to determine whether problems exist 

that warrant further review. These actions are encouraging, and if properly 

implemented, should improve controls over these payments. 

A continuing challenge for Education and FSA is preventing and collecting 

defaulted student loans. While the national student loan default rate has 

decreased from 11.6 percent in fiscal year 1993 to 5.9 percent in fiscal year 

2000, the cumulative amount of defaulted student loans has increased by 

almost $10 billion over the same period. Education and FSA have 

implemented several default management strategies, such as establishing 

electronic debiting as a repayment option, and working with some 

guaranty agencies to set up alternatives to service and process claims for 

defaulted loans. Our analysis of FSA’s internal documents indicated that 

for fiscal years 2000 through 2002, FSA met or exceeded many of the goals 

related to these strategies. However, neither Congress nor the public can 

determine whether FSA’s default management goals have been met 

because Education did not prepare performance reports that conform to 

the requirements in the Higher Education Act.7

 FSA’s report to Congress 

on its performance in fiscal years 2000 and 2001 was not timely nor did it 

indicate whether FSA met established performance goals. We have 

recommended that Education and FSA prepare and issue reports to 

Congress on FSA’s performance that are timely and clearly identify 

whether performance goals were met.8

Like other federal agencies, Education must address serious human 

capital issues, such as succession planning, because about one-third of 

Education’s workforce is eligible to retire. In June 2001, we recommended 

that the department develop human capital goals and measures for its 

 6

 U.S. General Accounting Office, Education Financial Management: Weak Internal 

Controls Led to Instances of Fraud and Other Improper Payments, GAO-02-406

(Washington, D.C.: Mar. 28, 2002). 

7

The requirements are in the amendments to the Higher Education Act that established FSA 

as a performance-based organization. Pub. L. No. 105-244, Title I, § 101(a), 112 Stat. 1581, 

1604-1610 (1998). 

8

U.S. General Accounting Office, Federal Student Aid: Timely Performance Plans and 

Reports Would Help Guide and Assess Achievement of Default Management Goals, 

GAO-03-348 (Washington, D.C.: Feb. 14, 2003). 
Page 5 GAO-03-872T 

performance plans.9 In April 2002, we recommended that the department 

and FSA coordinate closely to develop and implement a comprehensive 

human capital strategy.10 Education added a specific objective to its 

strategic plan, and in 2002, issued a comprehensive 5-year human capital 

plan that incorporates FSA. This plan outlines steps and time frames for 

improving human capital management and specifies four critical areas 

where improvements should be made: (1) top leadership commitment, 

(2) performance management, (3) workforce skills enhancement, and 

(4) leadership and succession planning. It will be important that Education 

focus continually on implementation of the plan to achieve results. 

Now, Mr. Chairman, I would like to discuss Education’s financial 

management challenges and the progress Education has made in 

addressing them. 

Weaknesses in Education’s financial management and information 

systems have limited its ability to achieve one of its key goals—improving 

financial management to help build a high-performing agency. Significant 

progress towards this goal was made earlier this year when Education 

received an unqualified—or “clean”—opinion on its financial statements. 

Prior to this, with the exception of 1997, Education had not received a 

clean opinion since its first agencywide audit in 1995. While this is an 

important milestone for the department, significant management 

weaknesses remain that must be addressed for Education to meet its goal 

in this area. 

Beginning with the department’s first agencywide audit in 1995, 

Education’s auditors have repeatedly identified significant financial 

management weaknesses. These weaknesses included Education’s 

inability to provide the auditors with sufficient evidence to satisfy 

themselves about the accuracy or completeness of certain amounts 

included in the financial statements, including billions of dollars of 

adjustments to amounts reported in previous years’ financial statements. 

 9

U.S. General Accounting Office, Department of Education: Status of Achieving Key 

Outcomes and Addressing Major Management Challenges, GAO-01-827 (Washington, D.C.: 

June 29, 2001). 

10U.S. General Accounting Office, Federal Student Aid: Additional Management 

Improvements Would Clarify Strategic Direction and Enhance Accountability, 

GAO-02-255 (Washington, D.C.: April 30, 2002). 

Financial 

Management 
Page 6 GAO-03-872T 

According to Education’s auditor, these adjustments were to correct 

“unnatural account balances” or otherwise adjust balances to the amount 

management’s analysis supported. The auditor reported that in many 

cases, the cause of the incorrect balances could not be definitively 

determined, and the adjusting entry prepared by management was a 

reasoned judgment of how to correct its accounts. Education’s auditors 

have also consistently reported major internal control weaknesses related 

to financial management systems and financial reporting. These 

weaknesses included (1) the absence of a fully integrated financial 

management system, (2) deficiencies in financial management practices 

that require extensive analysis of accounts to resolve errors through 

manual adjustments, (3) the lack of a rigorous review of interim financial 

data for timely identification and correction of errors, (4) the inability to 

accumulate, analyze, and present reliable financial information in the form 

of financial statements, (5) the dependence on a variety of stopgap 

measures to prepare financial statements, (6) the insufficiency of 

compensating controls, such as top-level reviews to address and try to 

compensate for systemic control weaknesses, and (7) the lack of a review 

to identify and quantify improper payments. Education’s auditors also 

reported that internal controls needed strengthening in numerous areas 

relating to Education’s investment of millions of dollars in property and 

equipment. 

Education has taken actions over the last several years to improve its 

financial management and to address the weaknesses identified. For 

example, during 2001, Education’s MIT developed specific actions to 

address issues raised in previous financial statement audits. According to 

a MIT report on its accomplishments, Education began performing certain 

critical reconciliations monthly and began preparing interim financial 

statements, which helped identify areas needing further study. Education 

also improved its internal controls over property and equipment, and its 

auditor did not report this area as a weakness in fiscal year 2002. In 

addition, according to Education’s auditor, during fiscal year 2002, the 

department implemented a new general ledger software package and FSA 

implemented a new financial management system to support management 

information reporting needs. The auditor also reported that the 

department implemented several processes during fiscal year 2002 to 

improve its financial management, including 

• convening the Accounting Integrity Board, the Audit Steering Committee, 

and the Accounting Assurance Group to plan, implement and manage 

quality accounting change control; 
Page 7 GAO-03-872T 

• establishing the Financial Statement Committee and continuing the 

Financial Statement Preparation Team and other special task force teams 

all of which are designed to improve the financial statement processes; 

and 

• developing and implementing reconciliation work plans, policies, and 

procedures; specialized teams; regular management reviews of the final 

work products; and management review for process improvement. 

While Education has made progress in addressing many of its weaknesses, 

in fiscal year 2002, the auditor again reported that significant financial 

management issues continued to impair the department’s ability to 

accumulate, analyze, and present reliable financial information. These 

problems, in part, resulted from inadequate internal controls over 

Education’s financial management systems and financial reporting 

process. The auditor also reported that weaknesses in the department’s 

ability to report accurate financial information on a timely basis were due 

to deficiencies in certain of the department’s financial management 

practices, including inadequate reconciliations and account analysis early 

in fiscal year 2002. The auditor added that issues associated with the 

transition to a new financial management system in fiscal year 2002 also 

contributed to the department’s difficulties in these areas. While the 

auditor reported that it noted improvements in the latter part of the fiscal 

year, it reported that it continues to believe that the department needs to 

focus more on reconciliation procedures, account analysis, and financial 

reporting. Until these issues are fully resolved, Education’s ability to 

produce timely, accurate, and useful financial information for its managers 

and stakeholders will be greatly impeded. In addition, beginning with 

fiscal year 2004, Education and other major government agencies will be 

required to produce audited financial statements within 45 days after the 

end of the fiscal year compared to 120 days for fiscal years 2002 and 2003. 

According to Education’s Fiscal Year 2004 Annual Plan, the department 

plans to implement this accelerated reporting date for its fiscal year 2003 

financial statements—a year earlier than required. This action will be a 

good “test” of Education’s new financial system and other financial 

management reforms. 

As we testified before the Subcommittee on Select Education in April 

2002, we identified other internal control weaknesses that make Education 
Page 8 GAO-03-872T 

vulnerable to improper payments and lost assets.11 In our testimony and 

related report, 12 we stated that for May 1998 through September 2000, 

weak internal controls over the (1) grants and loan disbursement process 

failed to detect certain improper payments, (2) third party draft processes 

increased Education’s vulnerability to improper payments, and 

(3) government purchase cards resulted in some fraudulent, improper, and 

questionable purchases. We also reported that Education lacked adequate 

internal controls over computers acquired with purchase cards and third 

party drafts. Among other things, we found that computer purchases 

valued at almost $400,000 were not recorded in Education’s property 

records, and $200,000 of that computer equipment could not be located. 

In response to our work, Education made several changes to its policies 

and procedures to improve internal controls and program integrity. These 

changes were a step in the right direction; but in many cases, our followup work indicated that they had not been effectively implemented. In 

March 2002, we reported that vulnerabilities remained in all areas we 

reviewed, except for third party drafts, which were discontinued 

altogether.13 For example, we reported that Education developed a new 

approval process for its purchase card program; however, our testing of 

3 months of purchase card statements under the new process found that 

over 20 percent lacked proper support for the items purchased. In October 

2002, Education told us that new policies and procedures were 

implemented and aimed at reducing the department’s vulnerability to 

future improper use of purchase cards. These new policies and procedures 

relate to reviewing and approving purchase card transactions and 

providing related training. Further, the department told us that misuse of 

purchase and travel cards is now specifically included in the department’s 

Table of Penalties with the desired effect of reducing misuse and abuse of 

government issued credit cards. Education also told us that it recognizes 

that reviewing and improving internal controls is an ongoing task and that 

it intends to remain vigilant in this area. These are positive steps that 

should help reduce the instances of improper purchases. 

 11U.S. General Accounting Office, Education Financial Management: Weak Internal 

Controls Led to Instances of Fraud and Other Improper Payments, GAO-02-513T

(Washington, D.C.: Apr. 10, 2002). 

12GAO-02-406. 

13GAO-02-406, 30. 
Page 9 GAO-03-872T 

Finally, Education will need to continue its actions in addressing 

weaknesses in its financial management information systems. The Federal 

Financial Management Improvement Act (FFMIA) of 1996 requires 

agencies to institute financial management systems that substantially 

comply with federal financial management systems requirements, 

applicable accounting standards, and the U.S. Government Standard 

General Ledger. Every year since FFMIA was enacted, Education’s 

auditors have reported that Education’s systems did not substantially 

comply with the act’s requirements. In previous years, the auditors 

reported that without a fully integrated financial management system, 

deficiencies in the general ledger system, deficiencies in the manual 

adjustment process, and the need to strengthen other financial 

management controls such as reconciliation processes, collectively impair 

Education’s ability to accumulate, analyze, and present reliable financial 

information. In addition, according to Education’s auditor, although the 

department implemented a new financial management system during fiscal 

year 2002, issues associated with the transition to the new system 

contributed to difficulties in providing reliable, timely information for 

managing current operations and timely reporting of financial information 

to central agencies; therefore, Education still did not substantially comply 

with FFMIA’s requirements. 

Education also needs to address identified computer security weaknesses 

in its financial management and other information systems. In September 

2001, we reported that Education had made progress in correcting certain 

information system control weaknesses.14 At the same time, we identified 

weaknesses in Education’s systems that place critical financial and 

sensitive grant information at risk of unauthorized access and disclosure, 

and key operations at risk of disruption. We recommended that Education 

correct certain information system control weaknesses and fully 

implement a comprehensive departmentwide computer security 

management program. In response, Education stated that it had developed 

a corrective action plan and is taking steps to further strengthen and 

develop a more comprehensive information security program. In addition, 

Education’s auditor reported that for fiscal year 2002, the department 

made progress in strengthening controls over its information technology 

processes but needs to continue efforts to develop, implement, and 

 14U.S. General Accounting Office, Education Information Security: Improvements Made, 

but Control Weaknesses Remain, GAO-01-1067 (Washington, D.C.: Sept. 12, 2001). 
Page 10 GAO-03-872T 

maintain an agencywide risk-based information security plan, programs, 

and practices to provide security throughout the life cycle of all systems. 

In closing, Mr. Chairman, I want to reiterate that Education is taking 

actions and making substantial progress in addressing major challenges 

related to its student aid programs and financial management. At the same 

time, some difficult issues remain that must be resolved before Education 

is able to produce relevant, reliable, and timely information to efficiently 

and effectively manage the department and provide full accountability to 

its stakeholders. 

Mr. Chairman, this concludes my statement. I would be happy to answer 

any questions you or other members of the Subcommittee may have. 

For information about this statement, please contact Linda Calbom, 

Director, Financial Management and Assurance, at (202) 512-9508, or 

Robert Owens, Assistant Director, at (202) 512-8579. You may also reach 

them by E-mail at calboml@gao.gov or owensr@gao.gov. Individuals who 

made key contributions to this testimony include Lisa Crye and Diane 

Morris. Numerous other individuals made contributions to the work 

supporting this testimony. 

Contact and 

Acknowledgments 

(190097) 
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